Numerous banks are operating in India. They cater to the banking needs of a large number of Indians. Good banking services make your financial life smooth and straightforward. However, things change a lot when a bank is closed or merged (with another bank or financial organization) due to any reason. As a result, you as the account holders of the bank experience some changes in your fiscal life.
Unstable financial conditions, economic slump, falling shares, many risks associated with customers, failure to fulfill their obligations, RBI regulations, scams, and government orders force a bank to shut down its operations or merge with another bank. A clear signal for doubts about the bank’s reliability is a too high-interest rate on deposits or a rating downgrade by international rating agencies. Account-holders need to be careful when the Reserve Bank of India imposes sanctions on banks. After this, the bank may face difficulties obtaining cash, make delays in payments, close its branches in different cities. In worse-case scenarios, it may shut down its office/headquarter or merge with another bank. What does it mean for account holders? Are their cash deposits safe, and interests protected? Let’s analyze.
When A Bank Is Shut Down: Repercussions For Account Holders
What Happens To Your Cash Deposits?
When a bank shuts down, cash deposits are the first thing people worry about. However, if your amount doesn’t exceed more than Rs 5 lakhs, you don’t need to worry about it. You can claim your amount (up to 5 lakhs) under the Deposit Insurance and Credit Guarantee Corporation Act, 1961′ (DICGC Act). Always keep in mind that your deposits and accounts with a bank come under this law once you have them. All depositors get this insurance automatically.
You have the right to receive compensation for deposited cash in the following events:
- If the reserve bank of India revokes the bank’s license with which you have maintained a bank account, opened an FD/RD account, etc.
- When the reverse bank of India imposes a moratorium on satisfaction of the bank’s creditors’ claims.
How To Claim Your Amount If The Bank Shuts Down Its Operations?
- Submit an application to the relevant authority under the Deposit Insurance and Credit Guarantee Corporation Act, 1961′ (DICGC Act),
- Submit the required documents, and
- Wait for results.
The authority will verify your claim for the fund’s refund and respond to you in the next 14 days. You can submit your request online or visit the agency’s office for the same. If you violate the deadline for applying for the claim for a refund, you must write a letter to the bank stating the reasons. The justification may include force majeure, military service, or illness. The agency’s administration will act on your request and hand over the requested deposits in 3 working days from the date of submission of the necessary documents.
A Few Important Points.
Your compensation will be made in cash (in rupees) or to the bank account you specify. If the deposit was made in any hard currency (US dollars, Euro, Japanese Yen, etc.), the amount of compensation is calculated in Rupees at the current exchange rate. If you have deposits in different banks, the agency will calculate the compensation amount separately. You can get an insurance refund through a representative if you have an appropriate notarized power of attorney. Heirs and nominees are also entitled to the payment.
What Will happen To Your Bonds?
Remember, bondholders of the liquidated bank will find it much more difficult to get funds than depositors. You probably shouldn’t dream of getting the entire amount. The law does not provide any guarantee for bonds without insurance indemnities. So their owners receive their money in the process of liquidation of the bank and other creditors and the last turn.
What Will Happen To Loans You Have Borrowed?
When a bank shuts down, account holders’ debt doesn’t go anywhere. Nothing changes for borrowers with such an unfortunate development. You still need to pay the loan regularly under the agreement’s requirements. The only question is who to pay now. When a bank sees the possibility of a complete shutdown of its operations, it can sell loans to debt collection agencies. The bank notifies you of the same within 30 days. After this, you still need to pay off the loan, but to a different bank or debt collection agency. You can keep paying off the loan with old banking details. If you find yourself in such a situation and do not know what to do with the loan, it is best to contact the bank directly & find out the most viable solutions.
Also Read: Account Aggregator System in India Explained
Can The Terms of The Loan Agreement Change?
In general, the amount of debt, the loan rate, and the monthly installment remain at the same level even after a change in the lender. The new bank or agency will offer to renew the loan agreement on new terms. If the new bank insists or obliges to renegotiate the contract, the terms significantly differ from the original contract, then challenge it in the court of law.
What Will Happen To Credit Cards If A Bank Shuts Down?
As long as your bank’s online services remain available, you can withdraw cash from your credit card at ATMs. But they may not work at specific POS centers. So you need to consult the bank and act as per instructions.
What Will Happen To Cheques If A Bank Shuts Down?
In general, cheques will become null and void if a bank shuts down completely. As a result, you can’t use them to make payments and daily business operations.
Bank Merger and its effects on Account Holders
In simple words, a bank merger is a reorganization of one or more banks that results in the liquidation of the former legal entity and the creation of a new one. The obligations of the merger participants are transferred to the new institution in full based on the transfer act.
In the banking environment, the main goals for conducting the merger procedure are-
- Consolidation of capital and assets ensures the merger of the organization and increases its reliability,
- Increased market share, which increases the level of competitiveness,
- Reduced management costs,
- Expanding the range of products and services offered to customers and
- Expanding the Bank’s geographical presence up to a great extent.
Your Deposits Are Safe
When two banks merge, don’t worry about deposits and your bank account. The merging process takes a lot of time. During this period, interruptions in banking services are pretty standard. It is possible that you may not be able to deposit cash in your bank account, withdraw money from an ATM card, use credit cards and conduct online banking activities. But the amount in your bank account remains safe and intact. You can use the amount per your requirement once the bank merging process is over. You can do this by using your old debit or visa card or getting a new ATM card issued by the new bank.
Customers May Leave The Bank Permanently
The bank merging process takes a lot of time because two banks communicate with each other on the terms and conditions of joining. They discuss everything in greater detail and point out the course of action of a new organization and in the view of existing account holders. Professionals have to merge the institution and the bank logo, work culture, software used for daily banking operations, staff, etc. Sometimes negotiation for a bank merger can last more than your expectation. But the unfortunate thing is that many people in India have a single bank account. If banking services are interrupted due to the merger process, they will not wait for a long time. Generally, they will switch to other banking services. So, two banks in the merging process may lose numerous customers and clients.
A Change in Indian Financial System Code
All individuals who use Internet banking to transfer funds from one account to another know the importance of the IFSC code. It is an 11 digit alphanumeric code used to identify bank branches before moving money to recipients. You need an IFSC code to transfer funds through RTGS, NEFT, and IMPS. After merging two different banks in one organization, the IFSC code of a new bank changes. You need to call the bank and note down the new IFSC code of your branch. After that, the old IFSC code becomes null and void. It would help if you started using the new IFSC code to transfer funds digitally.
A Change in MICR Code
After the merging of two different banks, the MICR code is changed. It is printed on cheques using MICR (Magnetic Ink Character Recognition technology). It allows banks to identify cheques issued by you and make payments to recipients as per your instructions. A MICR code is a nine-digit code that helps bank professionals identify the bank and branch taking part in an electronic clearing system. After the merger of two banks, your checkbook becomes invalid. Go to the new bank branch and get a new checkbook by placing a formal request. It will help make payments to people using cheques.
Update Your Banking App
A large number of Indians use mobile internet banking via apps. It allows them to sign in to their bank accounts quickly, generate service requests, transfer funds from one bank to another account and conduct other banking activities. When the merging of two banks is in progress, it is possible that the mobile app of your native banks may not work during that period. You will not be able to conduct any online banking activities due to the non-working status of the bank. Once the merging process is over, the new Bank activates its internet banking to allow users to use their bank account for different purposes. Delete the old bank’s mobile app from your handset and install the new app of the new organization. It would help if you used CIF (customer identification file- the bank’s unique CIF number to all ) to register yourself on a new banking app and start using your bank account. You may require to update your login details for security purposes.
Your Existing Debit/Visa Card
ATM cards allow people to withdraw cash from any ATM and lead a smooth financial life. When two banks merge and become one organization with a different name, many people think about what will happen with the existing ATM cards of old banks. As per RBI guidelines, all current ATM cards will work until their validity. When the existing ATM card expires, the bank will send a new card automatically to the specified address. If you want to discontinue the old ATM card, request the bank to issue an ATM against your name. For this, they may charge some fees.
Your Loan & Credit Cards
Don’t worry about these two because of bank mergers. The new banking organization will take care of it. In general, nothing changes with bank mergers regarding loan repayment. You need to pay off the loan to a new bank with the same interest fees and terms & conditions. When it comes to credit cards, you should continue to follow the agreement. You don’t see significant changes in the status of a credit card after a bank merger. However, you need to communicate with the new banker and see any possibility of changes.
Dumping Your Bank Account
When merging two banks is in progress, many people stop using their accounts forever due to disruption in banking services. If you don’t use your account for an extended period, the bank may suspend it and confiscate the amount due to a lack of transactions. In such situations, you will have to contact a new bank and make a formal request to reactive the bank account once again. Follow all the developments regarding the merger of your bank with another bank. Take all possible steps to keep your account in active mode.
The life of bank account holders takes a new turn when their bank is merged with another bank or shut down its operation altogether. Bank account holders need to follow these two incidents closely and take all possible steps to protect their interests in the best possible way. Timely action and active follow-up help preserve your hard-earned money & prevent significant losses after a bank merger or its complete shutdown.